A Path to Good Credit

Good credit can help you build a more financially stable life. Lenders, landlords and many employers use credit to judge your overall reliability. With good credit, you could qualify for lower interest rates, better loan terms, quality rental housing, and even certain job opportunities.

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How credit is measured

Your creditworthiness is based on:

Credit reports, which track:
- how you manage credit cards and loans over time
- whether you let any of your bills go into collections
- your history of applying for credit
Credit scores (a three-digit number, ranging from 300 to 850), which use information from your credit reports to predict how risky you are as a borrower.

Key factors that affect credit scores include:

Payment history on credit cards and loans – Credit card issuers and lenders report whether you pay your bills on-time to credit bureaus every month.
Credit utilization rate – How much credit you use in relation to the credit limit on each of your credit cards. For instance, if you have a credit card with a limit of $10,000, and a balance of $4,000, your credit utilization is 40%. The lower your utilization, the better your credit score.
Collections – If you stop paying one of your bills in full, your debt can be sent to collections. Collections stay on your credit report for 7 years, even if you pay what you owe.
Length of credit history – Having credit for longer has a positive impact on your credit score.
Type of credit – Accessing both types of credit— installment loans and credit cards—indicates how well you manage credit overall. A more diversified pool of credit is better for your score.
Inquiries (or applying for new credit) – Every time you apply for a credit card or loan, it lowers your credit score by about 3-10 points. Applying for one credit card has minimal impact, but applying for multiple cards, over a short period of time, can lower your score considerably. Note that when you access your own credit report, it does not impact your score.

The do’s and don’ts of good credit

DO:

Establish a credit score by opening and maintaining at least one credit card or loan.
Make on-time credit card and loan payments.
Keep balances below 30% of the credit limit on all of your credit cards.
Contact creditors early if you are struggling to pay your bills and ask for repayment options.
Monitor your credit report at AnnualCreditReport.com.

DON’T:

Avoid credit completely.
Make late payments, especially credit card or loan payments (a single late payment on a credit card or loan can lower your credit by 100-125 points).
Miss or skip payments without contacting the creditor to let them know what’s happening.
Max out your credit cards (as soon as you go above 30% of the credit limit, your score begins to go down). The higher your utilization, the lower your score.
Trust companies promising quick debt or credit fixes.

A Path to Good Credit

How credit is measured

The do’s and don’ts of good credit

DO:

DON’T:

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